2

Bitcoin mining will consume around 70TWh for 2020 (~3 nuclear power plants).

As far as I know, electricity is paid using fiat money. If 1 kWh costs 0.1 $, without counting hardware costs, that means that 1 year of mining costs $7 Billion for electricity.

At the moment, the Bitcoin capitalization is around 357 B$.

It follows that 2% (7/357*100) of the capitalization is used by electricity every year!

Who is paying for that (and how can it be sustainable)?

  • people who invest in Bitcoin using fiat money?
  • by Bitcoin deflation comparatively to fiat money?
  • people who lose money when/if Bitcoin goes down?
  • more generally: Mafia (an expensive laundry is not a problem if it is good)?
  • or I don't understand enough how Bitcoin works, and that's something else :-) ?
Improve this question
1
  • An interesting related question: what portion of the 'bitcoin market cap' will the network converge on as the yearly security expenditure?
    – chytrik
    Dec 7, 2020 at 21:27

4 Answers 4

Reset to default
2

The miners pay for the energy use directly, but the whole network pays indirectly. As @AndrewChow described, the miners provide a service to the network. They secure the ledger and provide the transaction ordering necessary for users to converge on a shared ground-truth. In exchange for this public service, the miners are reimbursed via block rewards.

The block reward consists of two parts, the block subsidy and the transaction fees. The subsidy consists of newly minted bitcoins. It doubles as both an incentive to miners as well as the initial distribution vector for bitcoins. It is financed via monetary supply inflation and thus a levy on all holders of bitcoins. The transaction fees are paid by the winning bids for the blockspace the transactions occupy in the blockchain.

You ask how this cost can be paid without anyone losing money. There is no such thing as a free lunch: the Bitcoin ecosystem pays an on-going maintenance cost for the network to continue running. There is no guarantee that the value of the overall Bitcoin ecosystem is stable or increases.

Improve this answer
7
  • I understand how miners recoup their costs from mining and transactions, and how costs will "gradually shift from holders to transactors". But what puzzles me, if the price of the Bitcoin was not increasing (or if most people was not thinking it will increase), does holders and transactors would accept to lose 2% every year of their capitalization in order to "secure the ledger" ?
    – souch
    Dec 7, 2020 at 22:21
  • What alternative do you propose?
    – Murch ♦
    Dec 7, 2020 at 22:43
  • I don't understand why you ask if I have a solution. I am just wandering how a money system can been seen as viable when only the ledger takes 70TW/year and how this cost is/can be supported by the whole system. My question is a bit biased, but I wanted to confront my thought with Bitcoin people. I think I'll accept your answer cause it answers more on how the costs are supported by the whole ecosystem.
    – souch
    Dec 8, 2020 at 23:22
  • Do you think that other financial systems do not have operating costs? Printing bills and minting coins is fairly expensive. Collecting, counting, cleaning, redistributing adds friction. Banks and payment providers run huge datacenters and offices. Central banks debase their currencies by several percent points per year by increasing the monetary supply. As long as the currency provides utility, why would people not be able and willing to pay for the upkeep?
    – Murch ♦
    Dec 9, 2020 at 3:16
  • It seems that many hodlers expect Bitcoin to store purchasing power better than alternative stores of value, or prefer Bitcoin for other reasons, so while I can't give a definitive answer why they accept the on-going cost, I have observed that they have been doing so for the past decade.
    – Murch ♦
    Dec 9, 2020 at 3:26
3

The people operating the mining hardware do. Mining hardware consumes electricity, so people who run the hardware receive an electricity bill from their electricity provider. They pay the bill using the proceeds from mining. Usually miners will sell some portion of the Bitcoin they earn for fiat, and pay for electricity using that fiat.

Improve this answer
3
  • All right, but that means that bitcoin must raise by at least 2% / year (i.e. running cost / total capitalization) against fiat money so that no-one lose money ?
    – souch
    Dec 7, 2020 at 9:59
  • @souch when miners exchange Bitcoin for fiat to pay electricity bills, the Bitcoin doesn't disappear. When the mining reward halves to insignificance in the future, transaction fees will pay for electricity. Bitcoin circulates but is not lost by circulation.
    – RedGrittyBrick
    Dec 7, 2020 at 11:08
  • Even if some answers (like this one) clarify things. My question (perhaps badly asked) was not on primary cost (the miners...) but more on how these costs are dispatched on the whole network and how or why these people are ok to pay 2% tax / year on their capitalization.
    – souch
    Dec 7, 2020 at 22:27
3

Who is paying for the running costs of Bitcoin?

The primary costs are almost entirely paid by miners.

Anyone else who runs any other sort of node (wallet etc) is likely to be also contributing by forwarding Bitcoin messages. They also pay a tiny amount of costs to sustain the network in terms of their own electricity costs, networking costs, capital assets (computers) depreciation etc.

Miners recoup their costs entirely from

  1. In the form of fiat currency from people who buy from miners their mined Bitcoin (the inflationary block rewards subject to halving roughly every 4 years).

  2. People using Bitcoin who include transaction fees in their Bitcoin transactions.

  3. Appreciation in value of their Bitcoin assets (probably).

So in the end the costs are paid by people using fiat to buy Bitcoin and people who send bitcoin to others (e.g. to purchase goods, services or other kinds of assets).

Improve this answer
1

The other answers do a good job of explaining how miners are compensated for their electricity (and other) costs. As the other answers point out, there are two ways that miners are compensated: block rewards and transaction fees.

In real terms, the block rewards (which halve approximately every four years) are paid for by everyone holding bitcoin, as the newly minted coins which comprise the block rewards have a deflating effect on coins already in circulation (by virtue of increased supply).

The transaction fees are paid by those that send coins to others. Senders include transaction fees in their transactions, and these transaction fees go to the miners. This incentivizes miners to include these transactions in blocks that they mine.

As the block reward decreases (with each halving), it is expected that transaction fees will have to increase, in order to incentivize miners to continue to mine. So, the costs of keeping the blockchain going will gradually shift from holders to transactors.

Improve this answer
4
  • When you say "are paid for by everyone holding bitcoin" what do you mean??
    – troy beckett
    Jul 27 at 9:01
  • @troybeckett It's supply and demand. With any currency - when more of it is produced, this increases the supply, which tends decrease its value.
    – mti2935
    Jul 27 at 15:11
  • I get that the price decreases but how is that price decrease connected to "are paid for by everyone holding bitcoin"
    – troy beckett
    Jul 27 at 21:22
  • They are paying (indirectly), because the bitcoin that they are holding has been devalued.
    – mti2935
    Jul 27 at 21:34

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.

Not the answer you're looking for? Browse other questions tagged or ask your own question.